Trump’s Array of Economic Ideas Arms Both Pessimists, Optimists

  • Tax cuts could boost growth, anti-trade steps depress it
  • Investors caught in a tug-of war between the two prospects

Kasman: Trump Policies Reflationary, but Face Constraints

President-elect Donald Trump upended the American political system with his stunning triumph. Now the question is whether he’ll do the same for the U.S. and world economies.

By calling for a wall to curb immigration from Mexico and tariffs to restrict imports from China, the billionaire developer is challenging some of the basic tenets that have underpinned the rise of a more globalized economy over the past half-century.

Yet he’s twinned that radical approach with more orthodox policies straight from the Republican Party’s play book -- big tax cuts and wide-ranging deregulation -- that might end up spurring U.S. and global growth.

“There is considerable upside potential for the markets and the economy under Trump, but even more potential downside,” said Andy Laperriere, a partner at Cornerstone Macro LLC in Washington and former Republican staffer on Capitol Hill.

After plunging in pre-opening trading on fears that a Trump win would wreck the economy, U.S. stock prices bounced back Wednesday as investors focused on his plans to cut taxes and increase infrastructure spending and the fillip they would give to growth.

For now, there’s a lot more uncertainty than clarity about what the next president will do. Trump didn’t flesh out many of the ideas he put forward during the campaign nor give much indication on who he’ll appoint to top economic posts in his new administration.

It’s also not clear what working relationship he’ll forge with the Republican Congress, which is key to getting his proposals for lower taxes and higher spending on infrastructure and defense implemented. Trump openly feuded with House Speaker Paul Ryan during the campaign and wound up his pitch to voters with a promise to “drain the swamp” in Washington.

Trump is taking power against the backdrop of a U.S. economy that it’s in its eighth year of what has been the weakest expansion since World War II.

It’s that sub-par outcome that Trump capitalized on in his successful drive to capture the presidency, winning over voters with his repeated charge that the system was “rigged” against them.

It’s also part and parcel of what International Monetary Fund Managing Director Christine Lagarde has called “the new mediocre” -- a global economy characterized by piddling growth and increasing income inequality.

The biggest risk to even that paltry performance comes from Trump’s threat to slap big tariffs on imports from China and Mexico to level what he says is a playing field heavily tilted in favor of America’s trading partners.

Trade Retaliation

If Trump goes ahead with his plans, even in a scaled-down form, China probably will retaliate, raising the specter of a trade war, said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington.

The president-elect has also called for renegotiation of the 23-year-old North American Free Trade Agreement between the U.S., Mexico and Canada and promised to abandon the proposed Trans-Pacific Partnership pact with 11 Pacific Rim nations.

“Trade and foreign investment have been the underpinnings of world economic growth for 60 years,” Hufbauer said. “That’s now behind us.”

Trump advisers say he’s not out to depress trade. He just wants to make sure the U.S. gets its fair share.

Unlike with his tax and spending proposals, Trump has a lot of leeway to act on his own on trade without congressional assent. Under existing legislation, for example, a U.S. president can impose a maximum 15 percent tariff on imports for 150 days.

The new president also doesn’t need congressional approval to pursue another one of the overriding themes of his campaign: stepped-up deportation of undocumented immigrants from Mexico and elsewhere.

Full Employment

With the U.S. at about full employment and companies finding it increasingly difficult to find the workers they need, any measures that would depress the potential labor force could lead to bottlenecks in the economy, said Allen Sinai, chief executive officer of Decision Economics Inc. in New York.

On the whole, though, Trumponomics should be a net plus for growth if he uses borrowed money to finance his tax cut and spending plans, Sinai said

“The bottom line is that the economic program of President Trump is pro-growth,” he said. “It’s classic macro-economic stimulus, which suggests a stronger economy, higher inflation, higher interest rates.”

That’s what powered both stock prices and bond yields higher the day after the Nov. 8 election as investors bet that stepped-up government deficits would increase gross domestic product and rates.

The boost to GDP though could prove short-lived as the higher rates act to constrict growth in the future, said Joel Prakken, chairman of St. Louis-based Macroeconomic Advisers LLC.

He also voiced doubts that fiscal hawks in Congress would go along with the bigger budget deficits that the Trump plan could generate.

“You’re going to have this tug of war between his very stimulative activities and his rhetoric on trade,” said Adam Schor, director of global equity strategy at Janus Capital Group Inc. in Denver.

“On balance, we do think the market is assessing this right, in the sense they’re looking at the benefits” and “weighing slightly less these concerns about trade and other more divisive policies,” he added.

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